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Lack of Bonus Plan Explanation Does Not Violate Sarbanes-Oxley

    Client Alerts
  • October 30, 2017

The Sarbanes-Oxley Act (SOX) prohibits publicly held employers from retaliating against employees who report illegal conduct that could have a material impact on shareholders. Since SOX was enacted, federal courts have issued multiple interpretations on specifically what employee conduct is protected under the law. Earlier this month in an unpublished decision, the Tenth Circuit Court of Appeals concluded that an employer’s failure to disclose details of a bonus plan in employee offer letters could not form the basis for a later SOX claim.

In Dietz v. Cypress Semiconductor Corp., the plaintiff was among a group of employees who joined the defendant when their former employer was acquired. Nine months after closing, the defendant placed some of the acquired employees under a bonus plan that under certain circumstances could require them to return a portion of their salary if incentive targets were not met. The plaintiff complained that the bonus plan violated applicable law and alleged that he was constructively discharged subsequent to the complaint. He filed an administrative SOX complaint, claiming that the employer’s failure to disclose or explain the bonus plan in his offer letter constituted federal mail and wire fraud.

The Tenth Circuit reversed an administrative award of more than $1 million to the plaintiff. The court noted that at the time of the acquisition, the defendant did not know which of the new employees would be subject to the bonus plan. Also, when the plan itself came into effect nine months later, the employer held meetings with employees to explain the bonus. Employees who did not wish to participate could resign and receive the same severance package available had they not accepted employment with the acquiring entity.

These actions did not violate SOX for two reasons. First, the employer’s conduct did not meet the requirements for federal mail or wire fraud. Second, the employer’s actions demonstrated a lack of any intent to deceive employees with respect to the bonus plan. Therefore, the plaintiff could not reasonably have believed that the offer letters were part of a scheme designed to deprive him of earned wages.

SOX provides serious remedies against companies that terminate employees in retaliation for complaining about improper activity. However, federal courts generally require a high level of evidence demonstrating that the alleged conduct constitutes a clear and material violation of law or otherwise adversely affects shareholders.